RABIGH REFINING AND PETROCHEMICAL COMPANY (A Saudi Joint Stock Company)

Transcription

1 FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2017 AND INDEPENDENT AUDITOR S REPORT

2 FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 2017 Page Independent auditor s report 1 6 Statement of profit or loss 7 Statement of comprehensive income 8 Statement of financial position 9 Statement of changes in equity 10 Statement of cash flows 11 Notes to the financial statements 12-45

3 Independent auditor s report to the shareholders of Rabigh Refining and Petrochemical Company Report on the audit of the financial statements Our opinion In our opinion, the financial statements present fairly, in all material respects, the financial position of Rabigh Refining and Petrochemical Company (the Company ) as at December 31, 2017, and its financial performance and its cash flows for the year then ended in accordance with International Financial Reporting Standards, that are endorsed in the Kingdom of Saudi Arabia, and other standards and pronouncements issued by the Saudi Organization for Certified Public Accountants (SOCPA). What we have audited The Company s financial statements comprise: the statement of profit or loss for the year ended December 31, 2017; the statement of comprehensive income for the year then ended; the statement of financial position as at December 31, 2017; the statement of changes in equity for the year then ended; the statement of cash flows for the year then ended; and the notes to the financial statements, which include a summary of significant accounting policies. Basis for opinion We conducted our audit in accordance with International Standards on Auditing that are endorsed in the Kingdom of Saudi Arabia. Our responsibilities under those standards are further described in the Auditor s responsibilities for the audit of the financial statements section of our report. We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion. Independence We are independent of the Company in accordance with the code of professional conduct and ethics, endorsed in the Kingdom of Saudi Arabia, that are relevant to our audit of the financial statements and we have fulfilled our other ethical responsibilities in accordance with these requirements. Our audit approach Overview Key Audit Matters First time adoption of International Financial Reporting Standards (IFRS) as endorsed in the Kingdom of Saudi Arabia; and Tax and zakat related matters PricewaterhouseCoopers, Jameel Square, P.O. Box 16415, Jeddah 21464, Kingdom of Saudi Arabia T: +966 (12) , F: +966 (12) ,

4 Independent auditor s report to the shareholders of Rabigh Refining and Petrochemical Company (continued) Our audit approach (continued) As part of designing our audit, we determined materiality and assessed the risks of material misstatement in the financial statements. In particular, we considered where management made subjective judgements; for example, in respect of significant accounting estimates that involved making assumptions and considering future events that are inherently uncertain. As in all of our audits, we also addressed the risk of management override of internal controls, including among other matters consideration of whether there was evidence of bias that represented a risk of material misstatement due to fraud. We tailored the scope of our audit in order to perform sufficient work to enable us to provide an opinion on the financial statements as a whole, taking into account the structure of the Company, the accounting processes and controls, and the industry in which the Company operates. Key audit matters Key audit matters are those matters that, in our professional judgment, were of most significance in our audit of the financial statements of the current period. These matters were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon, and we do not provide a separate opinion on these matters. Key audit matter How our audit addressed the Key audit matter First time adoption of International Financial Reporting Standards (IFRS) as endorsed in the Kingdom of Saudi Arabia For all periods up to and including the year ended December 31, 2016, the Company prepared its financial statements in accordance with generally accepted accounting principles as issued by SOCPA ( previous GAAP ). The Company prepared its first annual financial statements for the year ended December 31, 2017 in accordance with IFRS, that are endorsed in the Kingdom of Saudi Arabia, and other standards and pronouncements issued by SOCPA. In preparing the financial statements, the Company s opening statement of financial position was prepared as of January 1, 2016, which is the Company s date of transition to IFRS. We considered the transition from previous GAAP to IFRS, that are endorsed in the Kingdom of Saudi Arabia, as a key audit matter due to its pervasive impact on the financial statements in terms of recognition, measurement and disclosure. Further, management assisted by its experts had to make significant assumptions and exercise judgment during the transition process. Refer to Note 2 for basis of preparation and adoption of IFRS, Note 3 for accounting policies adopted by the Company and Note 5 for the transition adjustments and other details in connection with the transition from previous GAAP to IFRS. 2 We performed the following procedures: Obtained an understanding of the transition differences identified by the management between the previous GAAP and IFRS, that are endorsed in the Kingdom of Saudi Arabia, and assessed its completeness and appropriateness; Assessed the competence, objectivity and independence of the management s experts involved in the IFRS transition process; Evaluated the key decisions made by the Company with respect to accounting policies, estimates and judgements in relation to transition to IFRS, that are endorsed in the Kingdom of Saudi Arabia, and assessed their appropriateness based on our understanding of the Company s business and its operations; Tested the adjustments made as part of the transition process based on the differences identified; and Evaluated the adequacy and appropriateness of disclosures made in the financial statements in relation to transition to IFRS that are endorsed in the Kingdom of Saudi Arabia.

5 Independent auditor s report to the shareholders of Rabigh Refining and Petrochemical Company (continued) Key audit matters (continued) Key audit matter One of the areas of significant judgement in transition to IFRS was evaluation of classification of Company s lease arrangement with Rabigh Arabian Water and Electricity Company ( RAWEC ) for providing power, steam and water through an Independent Water, Steam and Power Plant ("IWSPP"). The Company concluded that it does not retain significant risks and rewards of the asset under this arrangement. Accordingly, the lease has been classified as operating lease by the Company. Refer to Note 2.2 for critical accounting judgments and Note 14.2 for disclosure on operating leases. How our audit addressed the Key audit matter For lease arrangement, we reviewed the agreement to understand the underlying arrangement between the Company and RAWEC and evaluated the arrangement in light of whether in substance the risks and rewards of ownership of the asset have been transferred to the Company. We also evaluated the underlying arrangement in accordance with the guidelines for the assessment of classification of lease under the requirements of relevant IFRS and held discussions with management s expert. Tax and zakat related matters (a) Change in tax status of the founding shareholder Pursuant to the Royal Order A/136 received during 2017, all the shares held by Saudi Arabian Oil Company (Saudi Aramco) (founding shareholder) in the Kingdom of Saudi Arabia s resident companies are subject to income tax instead of zakat with effect from January 1, Accordingly, income tax has been recognized for Saudi Aramco s owned interest in the Company for the first time. (b) Recognition of deferred income tax The Company has recognized a deferred tax credit of Saudi Riyals million in the statement of profit or loss for the year ended December 31, 2017 and maintains a net deferred tax asset balance amounting to Saudi Riyals million as of that date. Refer to Note 25 and Note 26 to the financial statements for the related disclosures. We performed the following procedures: Obtained income tax calculation relating to Saudi Aramco and evaluated reasonableness of such calculations in light of the Royal Order and tax regulations. Obtained deferred tax computation performed by management and evaluated the reasonableness of such computations. We also assessed the estimates and judgment involved in recoverability of the deferred tax asset balance outstanding at December 31, 2017 of Saudi Riyals million. 3

6 Independent auditor s report to the shareholders of Rabigh Refining and Petrochemical Company (continued) Key audit matters (continued) Key audit matter (c) Zakat and income tax assessments The General Authority for Zakat and Tax ( GAZT ) has issued assessments for the years 2011 up to 2016 by raising additional zakat and income tax demand of Saudi Riyals 1,306.2 million and Saudi Riyals million, respectively. The Company has filed an objection with GAZT and, accordingly, no zakat or tax provision has been made. Any additional zakat and tax demand that arises on finalization of assessments is recoverable to the extent of Saudi Riyals million and Saudi Riyals million, respectively from the founding shareholders of the Company. Refer to Note 25 for further details. How our audit addressed the Key audit matter Analyzed the differences between the amounts reported by the Company in its zakat and income tax returns against the amounts assessed by GAZT and obtained understanding of the nature of such differences and the possibility of any potential outflow of the economic benefits. We held discussions with the Company s zakat and tax consultants about the nature of differences and their assessment of likelihood of any additional liability. We assessed the adequacy and appropriateness of the disclosure included in the financial statements. We considered these tax and zakat related matters as key audit matters due to (i) change in the tax status of one of the founding shareholders in 2017; (ii) the consequential impact it contributed towards recognition of deferred tax asset and deferred tax credit as of December 31, 2017 and for the year then ended; and (iii) judgment involved in assessment of whether any provision needs to be recognized with respect to additional zakat and income tax demand raised by GAZT. Other information Management is responsible for the other information. The other information comprises the information included in the annual report of the Company, but does not include the financial statements and our auditor s report thereon, which is expected to be made available to us after the date of this auditor s report. Our opinion on the financial statements does not cover the other information and we will not express any form of assurance conclusion thereon. In connection with our audit of the financial statements, our responsibility is to read the other information identified above and, in doing so, consider whether the other information is materially inconsistent with the financial statements or our knowledge obtained in the audit, or otherwise appears to be materially misstated. When we read the annual report, if we conclude that there is a material misstatement therein, we are required to communicate the matter to those charged with governance. 4

7 Independent auditor s report to the shareholders of Rabigh Refining and Petrochemical Company (continued) Responsibilities of management and those charged with governance for the financial statements Management is responsible for the preparation and fair presentation of the financial statements in accordance with International Financial Reporting Standards, that are endorsed in the Kingdom of Saudi Arabia and other standards and pronouncements issued by SOCPA, and the applicable requirements of the Regulations for Companies and the Company s By-laws, and for such internal control as management determines is necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error. In preparing the financial statements, management is responsible for assessing the Company s ability to continue as a going concern, disclosing, as applicable, matters related to going concern and using the going concern basis of accounting unless management either intends to liquidate the Company or to cease operations, or has no realistic alternative but to do so. Those charged with governance are responsible for overseeing the Company s financial reporting process. Auditor s responsibilities for the audit of the financial statements Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, and to issue an auditor s report that includes our opinion. Reasonable assurance is a high level of assurance, but is not a guarantee that an audit conducted in accordance with International Standards on Auditing, that are endorsed in the Kingdom of Saudi Arabia, will always detect a material misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial statements. As part of an audit in accordance with International Standards on Auditing, that are endorsed in the Kingdom of Saudi Arabia, we exercise professional judgment and maintain professional scepticism throughout the audit. We also: Identify and assess the risks of material misstatement of the financial statements, whether due to fraud or error, design and perform audit procedures responsive to those risks, and obtain audit evidence that is sufficient and appropriate to provide a basis for our opinion. The risk of not detecting a material misstatement resulting from fraud is higher than for one resulting from error, as fraud may involve collusion, forgery, intentional omissions, misrepresentations, or the override of internal control. Obtain an understanding of internal control relevant to the audit in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company s internal control. Evaluate the appropriateness of accounting policies used and the reasonableness of accounting estimates and related disclosures made by management. Conclude on the appropriateness of management s use of the going concern basis of accounting and, based on the audit evidence obtained, whether a material uncertainty exists related to events or conditions that may cast significant doubt on the Company s ability to continue as a going concern. If we conclude that a material uncertainty exists, we are required to draw attention in our auditor s report to the related disclosures in the financial statements or, if such disclosures are inadequate, to modify our opinion. Our conclusions are based on the audit evidence obtained up to the date of our auditor s report. However, future events or conditions may cause the Company to cease to continue as a going concern. 5

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9 Statement of profit or loss December 31, Note Sales 6,27 34,211,010 25,146,130 Cost of sales 7,27 (31,514,986) (24,038,699) Gross profit 2,696,024 1,107,431 Selling and marketing expenses 8 (73,782) (68,775) General and administrative expenses 9 (969,289) (916,090) Other income, net 10 50,865 35,261 Operating profit 1,703, ,827 Financial charges 11 (445,974) (393,852) Financial income 257, ,147 Profit before zakat and income tax 1,515,641 75,122 Zakat 25 (29,687) (31,452) Income tax 5d,25 (62,977) (8,888) Net profit after zakat and income tax 1,422,977 34,782 Earnings per share (Saudi Riyals) - Basic and diluted The accompanying notes 1 to 30 form an integral part of these financial statements. 7

10 Statement of comprehensive income December 31, Note Net profit after zakat and income tax 1,422,977 34,782 Remeasurement loss on defined benefit plan 23 (18,040) (56,728) Income tax effect 5d,25 2,706 4,255 Other comprehensive loss not to be reclassified to statement of profit or loss in subsequent periods (15,334) (52,473) Total comprehensive income (loss) 1,407,643 (17,691) The accompanying notes 1 to 30 form an integral part of these financial statements. 8

11 Statement of financial position December 31, January 1, Note Assets Non-current assets Property, plant and equipment 13 43,971,487 43,503,259 40,649,172 Leased assets , , ,005 Intangible assets , , ,587 Long-term loans 16 4,051,329 4,421,900 4,278,661 Investment 16 16,412 16,412 16,412 Deferred tax asset , ,729 97,743 48,928,193 48,651,100 45,668,580 Current assets Cash and cash equivalents 17 1,158,263 1,381, ,396 Time deposits 18 1,479,073 1,286,250 1,370,180 Trade receivables 16 5,741,361 3,696, ,894 Inventories 19 3,022,322 2,258,973 2,002,494 Current portion of long-term loans , , ,271 Prepayments and other receivables , , ,635 12,746,784 9,594,947 5,732,870 Total assets 61,674,977 58,246,047 51,401,450 Equity and liabilities Equity Share capital 21 8,760,000 8,760,000 8,760,000 Statutory reserve ,745 87,343 87,343 Employee share ownership plan 23 (7,098) (8,207) (10,979) Retained earnings (accumulated deficit) 1,149,160 (443,620) (480,038) Total equity 10,085,807 8,395,516 8,356,326 Non-current liabilities Loans, borrowings and other long-term liability 16 36,812,511 37,674,856 34,425,507 Liabilities against finance leases , , ,615 Employees benefits , , ,869 37,715,171 38,517,397 35,172,991 Current liabilities Short-term borrowings 16 3,715,280 3,134,005 3,270,537 Current maturity of liabilities against finance leases 14 18,413 17,352 16,380 Trade and other payables 16 9,221,871 7,256,457 3,510,534 Accrued expenses and other liabilities , ,249 1,057,193 Zakat and income tax payable ,042 67,071 17,489 13,873,999 11,333,134 7,872,133 Total liabilities 51,589,170 49,850,531 43,045,124 Total equity and liabilities 61,674,977 58,246,047 51,401,450 Commitments 28 The accompanying notes 1 to 30 form an integral part of these financial statements. 9

12 Statement of changes in equity Note Share Statutory capital reserve Employee share ownership plan Retained earnings (accumulated deficit) Total January 1, ,760,000 87,343 (8,207) (443,620) 8,395,516 Net profit after zakat and income tax ,422,977 1,422,977 Other comprehensive loss (15,334) (15,334) Total comprehensive income ,407,643 1,407,643 Transfer to statutory reserve - 96,402 - (96,402) - Vesting of shares under employee share ownership plan - - 1,109-1,109 Zakat and income tax reimbursements , ,539 December 31, ,760, ,745 (7,098) 1,149,160 10,085,807 January 1, ,760,000 87,343 (10,979) (480,038) 8,356,326 Net profit after zakat and income tax ,782 34,782 Other comprehensive loss (52,473) (52,473) Total comprehensive loss (17,691) (17,691) Vesting of shares under employee share ownership plan - - 2,772-2,772 Zakat and income tax reimbursements ,109 54,109 December 31, ,760,000 87,343 (8,207) (443,620) 8,395,516 The accompanying notes 1 to 30 form an integral part of these financial statements. 10

13 Statement of cash flow Note Year ended December 31, Cash flows from operating activities Profit before zakat and income tax 1,515,641 75,122 Adjustments for non-cash items Depreciation 13,14 2,427,863 2,401,289 Financial charges 445, ,852 Financial income (257,797) (311,147) Amortization 15 13,156 18,611 Provision for slow moving inventories 19 10,078 8,274 Loss on disposal of property and equipment 10 1,267 4,089 Provision for deferred employee service ,156,182 2,590,344 Changes in working capital Trade receivables (2,044,674) (2,872,793) Inventories (773,427) (264,753) Prepayments and other receivables (75,659) (248,066) Trade and other payables 2,371,359 4,064,099 Accrued expenses and other liabilities (515,476) (821,947) Employees benefits 60,513 57,184 Zakat and income tax paid (68,350) (17,489) Interest received 238, ,723 Interest paid (256,276) (223,862) Net cash generated from operating activities 3,092,911 2,521,440 Cash flows from investing activities Purchase of property, plant and equipment 13 (2,601,915) (4,608,630) Addition to intangible assets 15 (1,051) (642) Long-term loan disbursements 16 (49,303) (478,746) Net movement in time deposits 18 (192,823) 83,930 Net cash utilized in investing activities (2,845,092) (5,004,088) Cash flows from financing activities Proceeds from loans and borrowings 16 10,500,000 8,879,084 Repayments of loans and borrowings 16 (10,924,425) (5,900,069) Repayment of finance leases 14 (46,925) (46,959) Dividend payments (1) (9) Net cash (utilized in) generated from financing activities (471,351) 2,932,047 Net change in cash and cash equivalents (223,532) 449,399 Cash and cash equivalents at beginning of the year 17 1,381, ,396 Cash and cash equivalents at end of the year 17 1,158,263 1,381,795 Supplemental schedule of non-cash information Zakat and income tax reimbursable from shareholders 281,539 54,109 Addition to property, plant and equipment through accrued expenses and other liabilities 267, ,012 Long-term loan repayments settled against capacity payments , ,603 The accompanying notes 1 to 30 form an integral part of these financial statements. 11

14 1 General information Rabigh Refining and Petrochemical Company ( the Company or PetroRabigh ) is a company registered in the Kingdom of Saudi Arabia under Commercial Registration No issued by the Ministry of Commerce, Jeddah, on Shaaban 15, 1426H (September 19, 2005) subsequently revised by the Ministry of Commerce and Investment, Riyadh on Shawal 22, 1428H (November 3, 2007). The Company is engaged in the development, construction and operation of an integrated refining and petrochemical complex, including the manufacturing and sales of refined and petrochemical products. The Company s registered address is P.O. Box 101, Rabigh 21911, Kingdom of Saudi Arabia. During the three-month period ended March 31, 2015, the Company acquired the Expansion Project of its existing integrated petroleum refining and petrochemical complex ( Phase II Expansion Project ) from Saudi Arabian Oil Company and Sumitomo Chemical Company (Founding shareholders of the Company), upon completion of the formalities underlying the novation of relevant contracts and fulfillment of precedent conditions. The aggregate cost of the Phase II Expansion Project is currently estimated at Saudi Riyals 34 billion, the completion of which is estimated to be during the second half of Also see Note Basis of preparation and adoption of International Financial Reporting Standards (IFRS) These financial statements of the Company have been prepared in accordance with IFRS as endorsed in the Kingdom of Saudi Arabia and other standards and pronouncements issued by Saudi Organization for Certified Public Accountants (SOCPA) in the Kingdom of Saudi Arabia. Also see Note 5. For all periods up to and including the year ended December 31, 2016, the Company prepared its financial statements in accordance with generally accepted accounting principles as issued by SOCPA ( previous GAAP ). These financial statements for the year ended December 31, 2017 are the first general purpose financial statements prepared by the Company in accordance with IFRS as endorsed by SOCPA in the Kingdom of Saudi Arabia and other standards and pronouncement issued by SOCPA. These financial statements have been prepared on a historical cost basis except for investment which is measured at fair value through statement of profit or loss. These financial statements are presented in Saudi Arabian Riyals (Saudi Riyals). 2.1 New standards, interpretations and amendments adopted Since the Company has adopted IFRS, as endorsed by SOCPA in the Kingdom of Saudi Arabia, all amendments/interpretations as applicable to the Company are considered until the date of adoption. (a) Standards, interpretations and amendments earlier adopted IFRS 9 Financial Instruments IFRS 9 is effective for annual periods commencing on or after January 1, The Company has elected to early adopt IFRS 9. Financial assets As per IFRS 9, the Company classifies its financial assets, initially measured at fair value and subsequently at amortized cost, fair value through profit or loss (FVTPL) or fair value through other comprehensive income (FVOCI) depending on the Company s business model for managing these financial assets and their contractual cash flow characteristics. A financial asset is measured at amortized cost only if both of the following conditions are met: - It is held within a business model whose objective is to hold assets in order to collect contractual cash flows; and - The contractual terms of the financial asset represent contractual cash flows that are solely payments of principal and interest. A new asset category financial asset measured at FVOCI was introduced by IFRS 9. A financial asset is classified as FVOCI if it is held within a business model whose objective is to hold assets in order to collect contractual cash flows and selling financial asset. 12

15 Financial liabilities As per IFRS 9, the Company has classified its financial liabilities as those measured at amortized cost. Impairment The Company assesses on a forward looking basis the expected credit losses (ECL) as associated with its financial assets carried at amortised cost. The impairment methodology applied depends on whether there has been a significant increase in credit risk since the initial recognition of the financial asset. For trade receivables, the Company applies the simplified approach permitted by IFRS 9, which requires expected lifetime losses to be recognized from initial recognition of the receivables. (b) Standards, interpretations and amendments issued but not yet effective The standards, interpretations and amendments issued, but not yet effective up to the date of issuance of the financial statements are disclosed below. The Company intends to adopt these standards, where applicable, when they become effective. Effective from periods Standard / Interpretation Description beginning on or after the following date IFRS 15 Revenue from Contracts with Customers January 1, 2018 IFRS 2 Classification and measurement of share-based payment transactions Amendments to IFRS 2 January 1, 2018 IFRIC 22 Foreign currency transactions and advance consideration January 1, 2018 IFRS 16 Leases January 1, 2019 IFRIC 23 Uncertainty over income tax treatments January 1, 2019 IFRS 17 Insurance contracts January 1, 2021 IFRS 15 Revenue from Contracts with Customers IFRS 15 was issued in May 2014 and establishes a five-step model to account for revenue arising from contracts with customers. Under IFRS 15, revenue is recognized at an amount that reflects the consideration to which an entity expects to be entitled in exchange for transferring goods or services to a customer. IFRS 15 will supersede all current revenue recognition requirements under IFRS. Either a full retrospective application or a modified retrospective application is required for annual periods beginning on or after January 1, The Company plans to adopt IFRS 15 on the required effective date using the modified retrospective method. The Company has performed impact assessment of IFRS 15 and has identified the following implications on the Company s financial statements. The Company is currently recognising revenue net of certain selling & marketing expenses, which are incurred and separately invoiced, by the marketers (customers). The Company records revenue net of said expenses in its books of accounts. As per IFRS 15, an entity shall account for consideration payable to a customer as a reduction of the transaction price unless both the following conditions are met: the payment to the customer is in exchange for distinct goods or services that the customer transfers to the entity, and the fair value of said goods or services can be determined. The Company has assessed that these selling & marketing expenses are in respect of distinct goods or services that the Company receives form customers and the fair value of said expenses can also be measured as these are separately invoiced to the Company supported by actual invoices. Accordingly, these expenses will be classified as selling & marketing expenses and not be deducted from revenue. IFRS 15 further requires additional disclosure for which the Company has considered required changes in the financial systems and related procedures necessary to collect and disclose the required information. Except for the effects of IFRS 15 disclosed above, the standards, amendments or interpretations with effective date of January 1, 2018 will not have any material impact on the Company s financial statements, whereas for other above mentioned standards, amendments or interpretations, the Company is currently assessing the implications on the Company s financial statements on adoption. 13

16 2.2 Critical accounting estimates and judgments The preparation of Company s financial statements requires management to make judgments, estimates and assumptions that affect the reported amounts of revenues, expenses, assets, liabilities and accompanying disclosures. Uncertainty about these assumptions and estimates could result in outcomes that require a material adjustment to the carrying amount of the asset or liability affected in future periods. The key assumptions concerning the future and other key sources of estimation uncertainty at the reporting date, that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial period, are described below. The Company based its assumptions and estimates on parameters available when the financial statements were prepared. Existing circumstances and assumptions about future developments, however, may change due to market changes or circumstances arising beyond the control of the Company. Such changes are reflected in the assumptions when they occur. Business model for managing financial assets In making an assessment whether its business model for managing financial assets is to hold assets in order to collect contractual cash flows, the Company considers the following: - Management s stated policies and objectives for the asset and the operation of those policies in practice; - how management evaluates the performance of the asset; - whether management s strategy focuses on earning contractual income; - the degree of frequency of any expected asset sales; - the reason for any asset sales; and - whether assets that are sold are held for an extended period of time relative to their contractual maturity or are sold shortly after acquisition or an extended time before maturity. Generally, a business model is a matter of fact which can be evidenced by the way the business is managed and the information provided to management. Contractual cash flows of financial assets The Company exercises judgment in determining whether the contractual terms of financial assets it originates or acquires give rise on specific dates to cash flows that are solely payments of principal and interest income on the principal outstanding and so may qualify for amortised cost measurement. In making the assessment, the Company considers all contractual terms, including any prepayment terms or provisions to extend the maturity of the assets that change the amount and timing of cash flows and whether the contractual terms contain leverage. Defined benefit plan The cost of post-employment defined benefits are the present value of the related obligation, as determined using actuarial valuations. An actuarial valuation involves making various assumptions which may differ from actual developments in the future. These include the determination of the discount rate, future salary increases, withdrawal before normal retirement age, mortality rates, etc. Due to the complexity of the valuation, the underlying assumptions and its long-term nature, a defined benefit obligation is sensitive to changes in these assumptions. All assumptions are reviewed at each reporting date. The parameter most subject to change is the discount rate. With respect to determining the appropriate discount rate, yield and duration of high quality bonds obligation, as designated by an internationally acknowledged rating agency, and extrapolated as needed along the yield curve to correspond with the expected term of the defined benefit obligation. Useful lives of property, plant and equipment The management determines the estimated useful lives of property, plant and equipment for calculating depreciation. This estimate is determined after considering expected usage of the assets or physical wear and tear. Management reviews the residual value and useful lives annually and future depreciation charges are adjusted where management believes the useful lives differ from previous estimates. 14

17 Lease classification Management exercises judgments in assessing whether the lease is a finance lease or an operating lease. The judgment as to which category applies to a specific lease depends on management's assessment of whether in substance the risks and rewards of ownership of the asset have been transferred to the lessee. In the instances where management s estimates that the risks and rewards have been transferred, the lease is considered as finance lease, otherwise it is accounted for as an operating lease. The Company has entered into a lease arrangement with Rabigh Arabian Water and Electricity Company ( RAWEC ) for providing power, steam and water to the Company through an Independent Water, Steam and Power Plant ("IWSPP"). The Company has determined that the significant risk and rewards of the asset under this arrangement are retained by RAWEC and not by the Company and, accordingly, the lease has been classified as operating lease by the Company. Provision for pre-novation withholding tax The management determines withholding tax on certain transactions with non-resident parties in the Kingdom of Saudi Arabia as required under Saudi Arabian Income Tax Law. Due to the nature and complexity of the services and transactions involved as part of the novation of the contracts related to Phase II Expansion Project, the assessment of withholding tax thereon involves estimates and judgments. Management, with the assistance of its advisors, uses estimates and judgment based on the best available facts and circumstances and interpretations and determines the amount of provision. Impairment of non-financial assets The Company assesses, at each reporting date or more frequently if events or changes in circumstances indicate, whether there is an indication that an asset may be impaired. If any indication exists, or when annual impairment testing for an asset is required, the Company estimates the asset's recoverable amount. An asset's recoverable amount is the higher of an asset's or cash-generating unit's (CGU) fair value less cost to sell, and its value in use, and is determined for the individual asset, unless the asset does not generate cash inflows which are largely independent from other assets or groups. Where the carrying amount of an asset or CGU exceeds its recoverable amount, the asset is considered impaired and is written down to its recoverable amount. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset. In determining the fair value less costs to sell, an appropriate source is used, such as observable market prices or, if no observable market prices exist, estimated prices for similar assets or if no estimated prices for similar assets exist, it is based on discounted future cash flow calculations. 3 Summary of significant accounting policies (a) Current versus non-current classification The Company presents assets and liabilities in the statement of financial position based on current/non-current classification. An asset is current when it is: - Expected to be realised or intended to sold or consumed in the normal operating cycle; - It is held primarily for the purpose of trading; - Expected to be realised within twelve months after the reporting period; or - Cash or cash equivalent. All other assets are classified as non-current. A liability is current when: - It is expected to be settled in the normal operating cycle; - It is held primarily for the purpose of trading; - It is due to be settled within twelve months after the reporting period; or - There is no unconditional right to defer the settlement of the liability for at least twelve months after the reporting period. The Company classifies all other liabilities as non-current. (b) Fair value measurement Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The fair value measurement is based on the presumption that the transaction to sell the asset or transfer the liability takes place either: - In the principal market for the asset or liability, or - In the absence of a principal market, in the most advantageous market for the asset or liability. 15

18 The fair value of an asset or a liability is measured using the assumptions that market participants would use when pricing the asset or liability, assuming that market participants act in their economic best interest. A fair value measurement of a non-financial asset takes into account a market participant's ability to generate economic benefits from the asset s highest and best use or by selling it to another market participant that would utilise the asset in its highest and best use. The Company uses valuation techniques that are appropriate in the circumstances and for which sufficient data are available to measure fair value, maximising the use of relevant observable inputs and minimising the use of unobservable inputs. All assets and liabilities for which fair value is measured or disclosed in the financial statements are categorised within the fair value hierarchy. This is described, as follows, based on the lowest level input that is significant to the fair value measurement as a whole: - Level 1: Quoted (unadjusted) market prices in active markets for identical assets or liabilities. - Level 2: Valuation techniques for which the lowest level input that is significant to the fair value measurement is directly or indirectly observable. - Level 3: Valuation techniques for which the lowest level input that is significant to the fair value measurement is unobservable. For assets and liabilities that are recognised in the financial statements at fair value on a recurring basis, the Company determines whether transfers have occurred between levels in the hierarchy by re-assessing categorisation (based on the lowest level input that is significant to the fair value measurement as a whole) at the end of each reporting period. The Company determines the policies and procedures for both recurring fair value measurement, and for non-recurring measurement. (c) Revenue recognition Contracts with customers Revenue is recognised to the extent that the Company has satisfied the performance obligations under contracts for sale of products with customers. The Company has contracts with customers (that also include marketers) in which supply of the refined products and petrochemicals is the only performance obligation. The Company recognized revenue at a point in time when control of the products is transferred to the customer, generally on delivery or shipment of products and in accordance with the offtake arrangements with the Company s customers. Revenue from port services is recognized when services are rendered. The Company assessed its revenue arrangements against specific criteria and determined that it is acting as principal in all of its revenue arrangements. Revenue is measured at the fair value of the consideration received or receivable, taking into account contractually defined terms of payment, excluding taxes and duty and is recorded net of trade discounts and volume rebates. Dividends Dividends are recognised when: - The Company s right to receive the payment is established, which is generally when shareholders approve the dividend; - It is probable that the economic benefits associated with the dividend will flow to the entity; and - The amount of the dividend can be measured reliably. Interest income Interest income is calculated using the effective interest (profit) rate method. The effective interest rate is the interest rate that exactly discounts the estimated stream of future cash payment or receipts over the expected life of the financial instrument or when appropriate over the shorter period. 16

19 (d) Foreign currencies The Company s financial statements are presented in Saudi Riyals which is also the functional currency of the Company. Transactions in foreign currencies are initially translated by the Company into Saudi Riyals using the exchange rate at the date of the transaction it first qualifies for recognition. Monetary assets and liabilities denominated in foreign currencies are retranslated in the functional currency using the exchange rate ruling at the reporting date. Differences arising on settlement or translation of monetary items are recognized in the statement of profit or loss. Non-monetary items that are measured in terms of historical cost in a foreign currency are translated using the exchange rates as at the dates of the initial transactions. Non-monetary items measured at fair value in a foreign currency are translated using the exchange rates at the date when the fair value is determined. The gain or loss arising on translation of non-monetary assets measured at fair value is treated in line with the recognition of gain or loss on change in fair value in the item (i.e., the translation differences on items whose fair value gain or loss is recognized in statement of comprehensive income or statement of profit or loss are also recognized in statement of comprehensive income or statement profit or loss, respectively). (e) Property, plant and equipment Property, plant and equipment are stated at cost, less accumulated depreciation and impairment loss, if any, except for capital projects-in-progress, which are stated at cost less impairment loss, if any. Cost includes expenditure that is directly attributable to the acquisition or construction of each asset. Finance costs on borrowings to finance the construction of the assets are capitalized during the period of time that is required to complete and prepare the asset for its intended use. Subsequent expenditure is capitalized only when it increases the future economic benefits embodied in the item of property, plant and equipment. All other expenditures are recognized in the statement of profit of loss when incurred. Spare parts that are considered essential to ensure continuous plant operation whose useful lives are more than one year are capitalized and classified as plant, machinery and operating equipment. When significant parts of property, plant and equipment are required to be replaced at intervals, the Company recognizes such parts as individual assets with specific useful lives and depreciates them accordingly. Expenditures incurred on testing and inspections, which are carried normally every 4 years, are capitalized as part of the respective items of property, plant and equipment and amortized over the period of four years. All other repair and maintenance costs are recognized in the statement of profit or loss as incurred. Pre-commissioning income is recognised net of related incidental costs and is included in capital projects-inprogress. Depreciation is calculated on a straight-line basis to write off the cost of property, plant and equipment over their estimated useful lives which are as follows: Number of years Buildings and infrastructure 8-25 Plant, machinery and operating equipment 2-23 Vehicle and related equipment 3-6 Furniture and IT equipment 3-14 An item of property, plant and equipment is derecognized upon disposal or when no future economic benefits are expected from its use. Any gain or loss arising on derecognition of the asset (calculated as the difference between the net disposal proceeds and the carrying amount of the asset) is included in the statement of profit or loss when the asset is derecognized. (f) Leases The determination of whether an arrangement is or contains a lease is based on the substance of the arrangement at the inception of the lease. The arrangement is, or contains, a lease if fulfilment of the arrangement is dependent on the use of a specific asset or assets and the arrangement conveys a right to use the asset or assets, even if that right is not explicitly specified in an arrangement. A lease is classified at the inception date as a finance lease or an operating lease. 17

20 Finance lease Finance leases that transfer to the Company substantially all of the risks and benefits incidental to ownership of the leased item, are capitalized at the commencement of the lease at the inception date at the fair value of the leased property or, if lower, at the present value of the minimum lease payments. Lease payments are apportioned between finance charges and reduction of the lease liability so as to achieve a constant rate of interest on the remaining balance of the liability. Finance charges are recognized as finance costs in the statement of profit or loss. A leased asset is depreciated over the useful life of the asset. However, if there is no reasonable certainty that the Company will obtain ownership by the end of the lease term, the asset is depreciated over the shorter of the estimated useful life of the asset and the lease term. Currently, depreciation is calculated on a straight-line basis over the estimated useful lives of the assets as follows: Number of years Community facilities 25 Marine terminal facilities 23 Desalination plant 17 Operating lease An operating lease is a lease other than a finance lease. Operating lease payments are recognized as an operating expense in the statement of profit or loss on a straight-line basis over the lease term. (g) Intangible assets Intangible assets, having no physical existence however separately identifiable and providing future economic benefits, are initially recognized at purchase price and directly attributable costs. Intangible assets are stated at cost less accumulated amortization and impairment loss, if any. Software and licenses Software and licenses procured for various business use and having finite useful lives are presented as intangible assets. Software and licenses are amortized on a straight-line basis over their estimated useful lives of 5 years and years, respectively. Amortization methods and useful lives are reviewed at each financial year end and adjusted if appropriate. Gains or losses arising from derecognition of an intangible asset are measured as the difference between the net disposal proceeds and the carrying amount of the asset and are recognised in the statement of profit or loss when the asset is derecognised. (h) Borrowing costs Borrowing costs attributable to the acquisition, construction or production of a qualifying asset that necessarily takes a substantial period of time to get ready for its intended use or sale are capitalised as part of the cost of the respective asset. All other borrowing costs are expensed in the period in which they occur. Borrowing costs consist of interest and other costs that the Company incurs in connection with the borrowing of funds. (i) Financial instruments The Company applied the following classification and measurement requirements for financial instruments. Recognition and derecognition of financial instruments A financial asset or financial liability is recognised when the Company becomes a party to the contractual provisions of the instrument, which is generally on trade date. The Company derecognizes a financial asset when the contractual cash flows from the asset expire or it transfers its rights to receive contractual cash flows on the financial asset in a transaction in which substantially all the risks and rewards of ownership are transferred. Any interest in transferred financial assets that is created or retained by the Company is recognised as a separate asset or liability. A financial liability is derecognized from the statement of financial position when the Company has discharged its obligation or the contract is cancelled or expires. 18

21 Classification of financial instruments The Company classified its financial assets into the following measurement categories: (i) Those to be measured subsequently at amortised cost; or (ii) Fair value through profit or loss. The classification depends on the Company s business model for managing financial assets and the contractual terms of the financial assets cash flows. The Company classifies its financial liabilities as those measured at amortized cost. Measurement Financial instruments at fair value through profit or loss are recognised initially at fair value with transaction costs recognised in the statement of profit or loss as incurred. All other financial instruments are recognised initially at fair value plus directly attributable transaction costs. The Company initially measures the trade receivable at the transaction price as the trade receivable do not contain a significant financing component. Financial instruments measured at amortized cost A financial asset is measured at amortized cost if it is held within a business model whose objective is to hold assets in order to collect contractual cash flows and the contractual terms represent contractual cash flows that are solely payments of principal and interest. The Company classifies its financial liabilities as those measured at amortized cost. Financial instruments measured at fair value through profit or loss Financial assets measured at fair value through profit or loss comprise items specifically designated as fair value through profit or loss on initial recognition and financial assets held within a business model whose objective is to hold assets in order to collect contractual cash flows and the contractual terms represent contractual cash flows that are not solely payments of principal and interest. Where a financial liability is designated at fair value through profit or loss, the movement in fair value attributable to changes in the Company s own credit quality is calculated by determining the changes in credit spreads above observable market interest rates and is presented separately in other comprehensive income. Upon initial recognition, financial instruments may be designated as fair value through profit or loss. Restrictions are placed on the use of the designated fair value option and the classification can only be used: - In respect of an entire contract if a host contract contains one or more embedded derivatives; - If designating the financial instruments eliminates or significantly reduces measurement or recognition inconsistencies (i.e. eliminates an accounting mismatch) that would otherwise arise from measuring financial assets or liabilities on a different basis. - If financial assets and liabilities are both managed and their performance evaluated on a fair value basis in accordance with a documented risk management or investment strategy. On initial recognition, for a financial asset the fair value option is only applied if it eliminates an accounting mismatch that would otherwise arise from measuring items on a different basis. The above fair value option criteria remains unchanged for a financial liability. Offsetting Financial assets and liabilities are offset and the net amount is presented in the statement of financial position when the Company has a legal right to offset the amounts and intends to settle on a net basis or to realize the asset and settle the liability simultaneously. 19